Since leaving the world’s richest school, in Cambridge, Massachusetts, they have climbed into the top ranks of hedge
funds and private equity. Altogether the firms oversee more than
$43 billion, exceeding Harvard’s $27.6 billion fund. All have
beaten their investment benchmarks since inception.

The endowment brain drain began in 1998, triggered in part
by the opportunity for its traders to run their own firms and
make more money, even as alumni and faculty complained they were
paid too much. In 2005, 14 months after seven members of the
class of 1969 criticized compensation in a letter to then-
President Lawrence Summers, endowment chief Jack Meyer quit,
ending a 15-year run, to form Convexity. As financial markets
plunged in 2008, Harvard’s investments lost a record 27 percent.

“Spinouts from Harvard Management like Charlesbank have
become some of the highest-performing investment managers in the
market,” said Lawrence Golub, a Harvard donor and the New York-
based chairman of Golub Capital, which manages $4.5 billion in
assets as a lender to buyout firms. “It’s an economic loss for
Harvard but a windfall for all the partners who are building
these great businesses and making way more than they would have
within the four walls of Harvard Management.”

Lost Expertise

The departing managers took with them expertise they honed
under Meyer, who built an internal trading team that included
fixed-income specialists David Mittelman and Maurice Samuels,
who joined him at Convexity. Tim Peterson, who started Regiment,
managed high-yield bonds. Charlesbank founder Michael Eisenson
led an in-house private-equity group at Harvard, while Jonathon Jacobson of Highfields managed equities. Phillip Gross and
Robert Atchinson of Adage were equity analysts.

Highfields, started in October 1998, has gained an average
of almost 13 percent a year, according to a person with
knowledge of the firm. That compares with the 3.6 percent
average return, including dividends, by the Standard & Poor’s
500 Index. Adage has outperformed the S&P 500 index by about 3
percentage points annually since the firm began trading in 2001,
according to two people with knowledge of its performance.

The people asked not to be identified because the firms
don’t make their returns public.

Meyer has outperformed a group of benchmarks based on
market indexes by an annual average of 7.7 percentage points
since he began trading in February 2006, according to a letter
to investors obtained by Bloomberg News.

Crimson Cachet

“The class of ‘69 spent a lot of time arguing over tens of
millions in compensation and ended up losing $10 billion,’’ said Steven Drobny, author of ‘‘The Invisible Hands: Hedge Funds Off
the Record -- Rethinking Real Money.’’

Officials at the funds run by former Harvard managers
declined to comment or didn’t return phone calls seeking
comment.

The cachet of Harvard -- where crimson is the school color
and the name of the daily newspaper and the sports teams --
helped the former endowment managers recruit investors when they
were on their own, said Lou Morrell, a former chief investment
officer at Wake Forest University in Winston Salem, North
Carolina, who invested with Meyer when he started Convexity with
more than 30 endowment employees.

Seed Money

After Jacobson and Eisenson left in 1998, the university
considered allowing Harvard Management Co., which oversees the
endowment, to manage money for other institutions to minimize
future defections. The university, which decided against the
move, went on to invest with the managers in exchange for a
break on fees. Convexity and Highfields received $500 million
apiece, while Regiment got $300 million, according to a person
familiar with the firms.

The allure of the Crimson Cubs is similar to that of the
Tiger Cubs, a group of funds set up by former traders at Julian Robertson’s Tiger Management LLC or seeded by the billionaire.
Robertson founded New York-based Tiger Management in 1990 and
built it into one of the world’s largest hedge funds in the late
1990s before returning clients’ money in 2000.

At Harvard, Meyer transformed the investment portfolio from
a conventional mix of stocks and bonds into a virtual hedge
fund. He also pushed the endowment into hard-to-sell assets such
as real estate, private equity and natural resources on the
theory that the university could afford to lock up its money in
long-term bets with the potential to exceed standard equity and
fixed-income returns.

Class of 1969

Meyer, 65, more than quintupled Harvard’s fund to $25.9
billion when he left from $4.7 billion when he started in 1990.
Gains averaged 16 percent a year in his final decade. Among the
biggest U.S. endowments, that trailed only Yale University, in New Haven, Connecticut, and Duke University of Durham, North
Carolina, which each returned 17 percent annually.

Harvard’s class of 1969 said in their November 2003 letter
to Summers that the combined $107.5 million earned by the fund’s
six top performers was excessive and the money would be better
spent on scholarships.

‘‘What we said and continue to believe is that working for
an educational institution, we didn’t think it was appropriate
for them to be compensated at levels they were being
compensated,” said Stanley Eleff, a lawyer in Tampa, Florida,
who was part of the group of 1969 graduates who wrote to
Summers. “We would never expect Harvard’s football coach to be
paid like an NFL coach.”

‘Talented Investors’

Eleff said, “Whether Harvard Management would’ve done
better or worse had some of these people remained, I’m not in a
position to comment about.”

John Longbrake, a spokesman for the university, said he
didn’t have information on fees paid to the former managers who
are investing for the school.

“We are pleased that so many talented investors have been
drawn to work at Harvard Management Co., and that our
organizational model allows us to benefit from their expertise
when they were employees and now as external managers,” he said
in an e-mail.

In the year ended June 2003, Samuels, who managed non-U.S.
fixed-income assets, earned $35.1 million, while Mittelman, who
managed U.S. bonds, received $34.1 million. Meyer said when he
resigned that scrutiny of Harvard Management’s compensation
played a secondary role in his decision.

El-Erian’s Tenure

After a nine-month search, Harvard named Mohamed El-Erian,
who oversaw emerging-markets investments at Pacific Investment
Management Co., to succeed Meyer. El-Erian resigned after less
than two years to return to Newport Beach, California-based
Pimco, where he became co-chief executive officer and co-chief
investment officer.

In the 12 months ended June 30, 2007, the first full year
under El-Erian, Harvard gained 23 percent, compared with the 18
percent average for endowments of more than $1 billion. In his
time, the percentage of money Harvard managers handled fell to
about 30 percent from as much as 85 percent under Meyer, partly
because of the exodus of internal managers.

El-Erian also started allocating money to hedge funds via
Mark Taborsky, whom he hired from Stanford University to head
investment with outside managers. Within a year, Taborsky’s team
revamped Harvard’s group of managers, with some of those
relationships forged in exchange for longer lockups of capital,
El-Erian wrote in his 2008 book, “When Markets Collide.”

Lehman Crisis

Jane Mendillo was hired as Harvard Management’s CEO in July
2008. Her first year was marked by the collapse of financial
markets in the wake of Lehman Brothers Holdings Inc.’s
bankruptcy in September of that year.

As the endowment plunged, so did the value of the
university’s interest rate swaps, pressuring Mendillo to
liquidate investments to extricate the school from a cash
squeeze. The university raised money by selling $2.5 billion in
bonds in December 2008 and also froze pay for all faculty and
nonunion employees that academic year.

After the record decline in the year ended June 2009,
investments rose 11 percent in the past year, beating the
school’s own benchmark while trailing the returns of a broad
group of institutions.

Harvard’s former managers have thrived, except for Sowood
Capital Management LP, started by Jeff Larson in 2004 with $500
million from the school. The $3 billion firm lost more than 50
percent as corporate bond and loan markets melted down in July
2007. Larson sold most of its assets to Citadel LLC, the
Chicago-based investment firm run by Kenneth Griffin, and
unwound its two funds. He spun out Denham Capital, a private-
equity firm, before his fund started losing money.

Regiment Capital

The Crimson Cubs are based in the John Hancock Tower, the
tallest building in New England, except for Regiment Capital,
whose office is a block away.

Adage and Regiment were two of Harvard’s biggest external
managers in 2008-2009, according to an internal document.
Regiment was listed as one of Harvard’s largest independent
contractors on a tax filing for the year ended June 2009,
receiving $33.7 million in fees.

Regiment, which generally invests in below-investment grade
assets, last year owned leveraged loans, options, credit-default
swaps and other securities, according to an investor document.

The firm’s hedge fund gained 7.1 percent in 2010, less than
the 14 percent increase of the Citigroup High Yield Index. The
fund has returned more than 8 percent annually since its March
2000 inception, beating the gain of the Citigroup benchmark,
according to a person familiar with the firm. The firm manages
about $6 billion.

‘B or B+’

Highfields, which bets on falling and rising asset prices
and invests in companies with large market capitalizations,
gained almost 16 percent last year, compared with the 15 percent
return by the S&P 500 index. The firm lost 18 percent in 2008,
when the S&P 500 lost 37 percent in the worst crisis since the
Great Depression, and rebounded 36 percent in 2009, more than
the 26 percent increase of the benchmark. In 1998, his last year
at Harvard Management, Jacobson earned $10.2 million, making him
its highest-paid employee.

Harvard no longer invests with the hedge fund, according to
a person familiar with the firm. In a January letter to
investors, the firm said “from an investment perspective, I
think we earned a B or B+ for 2010” and “in hindsight, we
passed on some opportunities that we now wish we hadn’t.”
Highfields managed $11.7 billion as of Dec. 31.

Adage, Charlesbank

The biggest Crimson Cub by assets is Adage, which is
currently closed to new investors. The firm, with $13.5 billion
in assets, gained 15.3 percent last year, compared with the 15.1
percent return by the S&P 500, according to two people familiar
with the firm. The fund lost 38 percent in 2008 and regained 41
percent in 2009.

Charlesbank has raised seven private equity funds, starting
the first three between 1991 and 1997 when the group was part of
Harvard. The funds combined returned an average of more than 22
percent a year through September, according to a person with
knowledge of its record.

The firm’s $590 million fifth fund, raised in 2000, was its
best performer, returning about 22 percent, beating the 20
percent gain of funds in the top 25 percent as tracked by
consulting firm Cambridge Associates. Charlesbank’s poorest
performing fund, its $985 million pool raised in 2005, has
returned about 17 percent, more than the 9.6 percent increase of
peers in the top 25 percent as tracked by Cambridge.

Convexity Outperforms

Meyer’s investment strategy fares best in choppy markets,
he said in a January annual letter to clients. He told clients
the firm beat benchmarks by 5 percentage points last year in a
“mediocre” trading climate. The $12.3 billion fund beat its
targets by 4.5 percentage points in 2008, before its biggest
year in 2009, when it exceeded targets by 20 percentage points.

Harvard Management had an annual average gain of 4.7
percent over the past five years, compared with a 3 percent
increase for its internal benchmark.

“The compensation protesters have accomplished none of
their goals,” Golub said. “The people they were complaining
about are making more money and Harvard’s endowment has less
money.”